Determinants of Bank Profitability in Ethiopia: A Case Study of Private Commercial Banks

Abstract

The study was attempted to investigate determinants of bank profitability in Ethiopian private banks using secondary data. The data were obtained from audited financial statements of six sampled private commercial banks for the period of 2004 to 2011 and National bank of Ethiopia. Novel features of the study were the analysis of variables which are missed by other researcher; labor productivity, overhead, liquidity, and market share. The study used return on assets (ROA) as dependent profitability variable. Moreover, the study used both bank specific and external variables as explanatory variables. Both descriptive statistics and econometrics model specifically fixed effects estimation were used to analyze the relationships of profitability variable with explanatory variables. The major findings of the study shows that bank specific determinants were very important in explaining profitability than external variables. The Asset size, capitalization, labor productivity, liquidity and non interest income were positively and significantly related to bank’s profitability, while credit risk and overhead efficiency have a negative impact on profitability of bank specific drivers.

Keywords: Determinants, External Factors, Internal Factors, Profitability, Private Banks, and Ethiopia